Last update: Mar 13, 2021

Is Bitcoin the Next “Big Short?”

If you’re reading this article and haven’t seen “The Big Short,” I would highly recommend checking it out. While it doesn’t have much to do with cryptocurrencies directly, it has plenty to do with shorting, how it works, and one of the most profitable shorts in the history of US finance. 

But what does it mean to short sell Bitcoin? And can Bitcoin be shorted? Is Bitcoin the next “big short?” I’ll answer the questions and more below.

What is Shorting?

bitcoin shorting

Shorting Bitcoin is a method in which you borrow BTC and sell it at the current market value. At a later date, you buy back the Bitcoin to pay the person you borrowed the BTC.

The hope is that Bitcoin’s price drops, so it won’t cost you as much money when you buy it back. You pay back the amount owed and pocket the rest of your digital currency as a profit.

Can Bitcoin be shorted?

Yes, Bitcoin can be shorted. But short-selling is not for the faint of heart. It requires a solid understanding of how financial markets work.

Plus, it would help if you were prepared to cover your losses, especially since there is a high risk due to volatility in the crypto industry.

If the time comes for you to pay back the digital asset you borrowed, and the market price hasn’t dropped, you’re still on the hook for the amount you took.

Ways To Short Bitcoin

As the saying goes, “There’s more than one way to skin a cat.” That means there’s more than one way to do something, and the same applies to shorting BTC.

Listed below are a few of the more common trading strategies used to short Bitcoin.

Margin Trading

trading bitcoin

One of the simplest methods for shorting BTCis done through margin trading. This is typically done through the use of a dedicated cryptocurrency trading exchange. With margin trading, you borrow money to make a trade, usually through a broker.

The intention is that your prediction about the price of Bitcoin falling winds up being accurate. Some of the more popular exchanges that allow shorting BTC through margin trading include Coinbase, Binance, and Kraken.

Pros

  • Trading flexibility
  • Potential for exponential growth
  • Increased buying power

Cons

  • Margin calls
  • Additional risk
  • Stress when trading

How to Margin Trade BTC

When you’re ready to short Bitcoin using margin trading, there are just a few simple steps you need to follow:

  1. Determine which exchange you want to use and create an account. Find a crypto trading platform that works for you. Shorting Bitcoin can be fun and exciting, but it also comes with risks. Using the right exchange can make things much easier.
  2. Analyze the market and prepare a strategy. Have a plan of attack and stick to it. It might work, it might not, but you won’t know the answer until the dust settles. If you were wrong, own it, adjust, and give it another go.
  3. Keep an eye on the price of Bitcoin. Better yet, create a STOP function that will close the order automatically when the price is reached. Don’t get greedy. The crypto market is a fickle beast, and if you don’t create an automated stop order, you may wind up regretting it.
  4. Close the order and analyze the market to understand how to read the market for future orders.

Futures market

bitcoin futures market

Like other digital currencies, a futures market exists for Bitcoin. In this market, traders and investors can short sell BTC.

While the idea sounds simple, the execution can get confusing and complicated, which is why you should know exactly what you’re doing if you decide to short Bitcoin in the futures market.

Essentially it boils down to a future, which is a contract. With this kind of contract, the buyer says they will purchase a set amount of Bitcoin at a specific price at a future date.

When you own a futures contract, you’re anticipating the price of BTC to rise. If you sell a futures contract, you’re predicting that the price of Bitcoin will go down.

Pros

  • High leverage
  • Ability to make money even in a bearish market
  • No commission fees to pay

Cons

  • Can be complicated
  • Primarily speculative in nature

How to Trade BTC On Futures Market

Trading in a Bitcoin futures market is not as simple as margin trading. You’ll want to do plenty of research and follow these steps:

  1. Learn how to trade in a futures market. Short-selling Bitcoin has its challenges, so be sure you completely understand what you’re doing before you do it.
  2. Build and develop a trading plan. Pros have a plan of attack before their games, and so should you. Create your plan and see it through.
  3. Find and select a trading platform. There are plenty of crypto exchanges that offer futures market trading. Do some research and find one that makes sense for you.
  4. Test your plan and platform with a demo account. Think of it as a test drive before buying a car. Get a feel for the platform and what features it offers before you decide to start trading your hard-earned money.

Binary options trading

binary options

Another method of shorting Bitcoin is through binary options. This process involves using options referred to as “call” and “put.”

Purchasing a “put” option gives a trader permission to sell a set amount of Bitcoin. With this option, you set the time and price when the Bitcoin gets sold.

The goal is to sell your Bitcoin at the price when you purchase the put option, even if your crypto asset loses value at a later date.

On the other hand, buying a call option provides users the chance to purchase a fixed amount of Bitcoin at a given price until a set date. This set date is referred to as the expiration date.

You can find binary options available on many cryptocurrency exchanges, including Bitmex, Bitfinex, Binance, etc. However, keep in mind that both the cost and the risk can wind up being very high for crypto traders.

Pros

  •  You can trade even if you have a smaller budget.
  • Provides a low-cost way to short bitcoin and other digital assets

Cons

  • Demo testing may not support binary trading.
  • Poorly regulated part of bitcoin trading

How to Earn BTC With Binary Options

It’s important to have a good plan of attack when binary trading Bitcoin, so be sure to do plenty of research beforehand. Here are a few steps you can use when you’re ready to short Bitcoin through binary options:

  1. Research, research, research. Learn and do as much technical analysis as you can about binary options and the “put” and “call” options. The more knowledge you have before you begin trading, the better.
  2. Find a good crypto exchange to do your binary options trading. Not all cryptocurrency platforms are created equal, so dig deeper into what each exchange has to offer.
  3. Use the demo. When you short bitcoin with binary options, you’re taking on a lot of risk. Run through your plan multiple times by using a dummy account to understand the market’s ins and outs better.
  4. Start small and work your way up. It’s not a good idea to go all in your first time. Work with a small amount, watch how the market reacts, adjust your plan, and go from there. Win small trades, then increase your investments.

Prediction markets

bitcoin prediction markets

One last way we’ll talk about shorting BTC is through prediction markets. These markets are built on the idea that investors can predict when the Bitcoin bubble will pop. Investors then wager on whether or not these predictions are accurate.

It might sound complicated, but it’s fairly straightforward once you break it all down. In a prediction market, investors create a specific event, then make bets based on the outcome.

When it comes to shorting BTC, the event would directly relate to how the digital currency performs.

If you believe the prediction is accurate, you purchase shares. If you fall on the other side of the coin, you sell. So, you want to locate a prediction that says the coin’s price will decline for shorting Bitcoin.

When you do, you go long on that prediction. On the flip side, if you see one that predicts Bitcoin will rally, you go short. That’s all there is to it.

Pros

  • Long-term forecasts available
  • Accurate predictions maintained through technical analysis and proper trading methodologies.

Cons

  • Not a good platform for novice traders
  • Highly speculative trading method

How to Predict BTC Market

When it comes to shorting Bitcoin in a prediction market, it’s best to know exactly what you’re doing. Here are a few steps you can use to ensure you don’t wind up losing your shirt:

  1. Gain experience on other Bitcoin exchanges. Participating in prediction markets is not a place for beginners. If you haven’t done much trading in the blockchain industry, it might be best for you to start somewhere else first.
  2. Select a platform. You can use several prediction market platforms, but if you do some recon beforehand, you can familiarize yourself with the exchange before you make your first investment.
  3. Find a prediction you like. If you’re going to take the short position for Bitcoin, be sure it’s a prediction that makes sense to you.

What is the Best Option for Shorting BTC in the US?

These shorting Bitcoin options sound great until you realize that many aren’t available in the United States.

The biggest hurdle facing many US investors are the regulations put in place by the Securities and Exchange Commission.

There are a few ways to get around these regulations, but they aren’t as straightforward as simple margin trading to short bitcoin.

Your best bet is to use Kraken, the only major exchange that allows leverage trading in the US. It’s not a clean and cut process, but investors can short bitcoin using the platform.

You will incur charges and fees if you leave the order open too long, so it’s mostly for short-term transactions. It’s not elegant or sophisticated, but it’s probably the best you’re going to get if you want to short BTC in the United States.

author Andrej Ilisin

A serial entrepreneur working primarily with digital assets. He's the CEO of Sharp Capital, a company that focuses on growing online businesses. Andrej is also huge crypto, chess, and CrossFit enthusiast.